Buy America! For an extra $3M – this time

by Tom Yamachika, President, Tax Foundation Hawaii

Rail was in the news again. The low bidder for the Kamehameha Highway Stations Group appeared to be Watts Constructors, which bid $112.7 million for the project. The job went to Nan Inc., which bid $115.8 million. Why did that happen?

The disqualification of Watts’ bid has to do with a federal law called the Buy America Act. To oversimplify the Act, if you have a transportation infrastructure project and you use steel in its construction, the steel needs to be wholly manufactured in the United States. This law is not the same as the “Buy American Act,” which is an entirely different Act despite the similar name. The second Act applies to purchases made by federal government agencies, requiring that preference be given to American-made products.

Apparently, Watts was ready and able to certify that any steel products they themselves would be using on the rail stations were manufactured in the United States, and that they would be welding the steel here in Hawaii with U.S.-made welding rods. But the submission of certificates of non-compliance on behalf of three of its subcontractors appeared to be the deal-breaker.

Watts then wrote to the Federal Transit Administration, apparently saying, “Look, we submitted these documents from our subcontractors saying they wouldn't be compliant, but our bid specifications didn't require us to submit them in the first place. Oopsie! Can we have a do-over on this?”

In a letter to Watts dated December 18, 2015, the FTA’s response was basically, “Look, when you are certifying Buy America requirements you aren't just certifying your own work, you're certifying all work done on the contract. If your subcontractors won't comply, then you can't say the project complies. You might be able to continue if your bid were 25% lower than a compliant bid, but yours is maybe 5% lower. Good-bye.”

As a result, HART needed to go to the next highest bid, for $3 million more.

In 1978, a Congressional committee report said that the Buy America Act’s purpose was:

to protect American manufacturers and suppliers who have suffered substantial losses as a result of competition from foreign imports which, in many cases, are underpriced because of governmental financial support and cheap labor costs. The loss of business by domestic companies adds to the trade deficit, fuels inflation and leads to unemployment and reduced productivity. 

H.R. Rep. No. 95-1485, 95th Cong., 2d Sess., at 68 (1978).

The Buy America Act looks like economic protectionism. As such, the Jones Act, which has generated vigorous discussion in our state, is cut from the same cloth. However, the Buy America Act has a few more loopholes in it than the Jones Act does – exceptions can be made not only for a 25% lower bid, but also for products that are not manufactured in the United States (in sufficient and reasonably available quantities of satisfactory quality), as well as in situations where an exception is in the public interest.

The policy question, therefore, is whether economic protectionism is desirable. Our Federal Government is working hard to sign international trade agreements such as NAFTA and TPP, which are generally made to break down barriers to a free market. The Buy America Act, the Buy American Act, and the Jones Act are on the other end of the spectrum. What’s the best course of action here? Let there be debate!

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